All buyers of real estate should have a budget (pro-forma) when trying to determine what they should pay for a home that needs repairs. After all, for most of us it is the single largest investment we will ever make. We are going to use terms a Lender would use, these are terms you need to understand when trying to obtain financing.
When developing the pro-forma you need to consider all of the elements that could impact what price you eventually pay for that home. The formula below is often used in developing a pro-forma, but as we will see not all variables in the subsets of the formula may apply in every situation.
Selling price (repaired selling price) - repair costs (hard costs) - other costs (soft costs) - profit (entrepreneurial incentive) = the as-is purchase price. So let’s start with cost versus price and value. Just because it cost $5 does not mean someone will pay you (price) $5 upon re-sale or the bank (value) will lend you $5 either. It may be less it may be more.
